U6: T20 - MORTGAGE REPAYMENT METHODS Flashcards
(37 cards)
How is a low‐cost with‐profit endowment is structured?
A low‐cost with‐profit endowment comprises two elements: with‐profits and decreasing term assurance. The sum assured under the with‐profits element is not large enough to cover the full cost of repaying the mortgage initially; it builds up as bonuses are added. The difference between the size of the mortgage to be repaid and the value of the policy is made up by a decreasing term assurance, so that there is always enough cover to repay the loan should the policyholder die before the end of the mortgage term. As the value of the with‐profits element increases, the level cover provided by the term assurance decreases.
How does a unit‐linked endowment work?
With a unit linked endowment, the premiums are used to buy units in an investment fund. The objective is to ensure that the value of the units increases to provide a sum at least large enough to pay off the mortgage.
Pure interest‐only is accepted for what type of mortgages?
Business BTL
Define ‘Pure interest-only’ mortgages.
In a very limited number of situations it may be appropriate for the lender to arrange an interest‐only mortgage with no repayment vehicle.
An example is the eventual sale of the mortgaged property as the repayment method, but only where the value of the property should be sufficient to repay the mortgage. The lender cannot allow for house price inflation as part of the calculation, so the LTV of such a loan would be relatively low.
The technical term used for the frequency of interest calculation is ‘rest’. True or false
True.
We have daily rest, monthly rest and annual rest calculations.
Which of the interest calculation has the following has the fastest debt reduction?
1) Annual rest
2) Monthly rest
3) Daily rest
3) Daily rest
Potentially least interest over the term and quickest debt reduction
Which of the interest calculation has the following has the highest interest paid?
1) Annual rest
2) Monthly rest
3) Daily rest
1) Annual rest
Most interest paid over the term: slowest debt reduction
Many lenders will allow an existing mortgage to be switched from an annual to a daily rest basis on request. True or false
True
Many lenders will allow an existing mortgage to be switched from an annual to a daily rest basis on request. True or false
True
A borrower with which of the following interest calculations is most incentivised to make adhoc repayments?
1) Annual rest
2) Monthly rest
3) Daily rest
3) Daily rest
The daily rest basis benefits borrowers who want to make ad hoc single payments or overpayments to reduce their mortgage because the additional payment will reduce the balance immediately, whereas those on a monthly basis will have to wait until the monthly calculation date to see a reduction.
With respect to APRC, which of the following are excluded from the total charge for credit (TCC) calculation?
A) Early repayment charges
B) Valuation fees
C) Arrangement and administration fees
A) Early repayment charges - not included
Also:
- endowment and other life assurance premiums;
- charges levied in respect of any default by the borrower.
What is the second APRC?
For MCD regulated mortgages there is an additional requirement. Where the rate of interest or charges applied to the mortgage are variable, the lender must include a second APRC figure in the ESIS or as part of the KFI top‐up.
True or false: Where the mortgage is on an uncapped variable-rate basis, the second APRC must use the product’s lowest borrowing rate over the previous 20 years
False.
Where the mortgage is on an uncapped variable-rate basis, the second APRC must use the product’s highest borrowing rate over the previous 20 years
True or false: Where the interest rate is capped, the second APRC must assume the rate rises to the capped limit at the earliest point.
True
In the first year of a capital repayment mortgage, repayments are mainly interest. True or false?
True. The proportion of capital repaid gradually increases as the term of a capital repayment mortgage progresses.
Capital repayment mortgages offer borrowers the possibility of a capital surplus at the end of the term. True or false?
False. Repayment mortgages simply repay the borrowed capital over the term.
Cathy has a capital repayment mortgage of £150,000 over a 25‐year term. The interest rate is 3 per cent on an annual rest basis and her monthly repayment is £711 (to the nearest whole pound). Calculate how much of the capital she will repay in the first year.
Annual interest paid = £150,000 ÷ 100 x 3 = £4,500
Monthly interest paid = £4,500 ÷ 12 = £375
Monthly repayment less monthly interest = £711 – £375 Monthly capital repayment = £336
Annual capital repayment = £336 x 12 = £4,032
Greg has a capital repayment mortgage on which the interest rate has just increased. Greg’s lender has agreed that he can maintain his monthly repayments at the level prior to the rate increase. What effect will this have?
a) The mortgage term will decrease.
b) The mortgage term will increase.
c) The mortgage term will not be affected.
d) Greg’s lender will require him to make overpayments later in the term.
b) The increase in the interest rate means that more of Greg’s monthly repayment than originally planned will be used up paying interest. The capital will reduce more slowly and so the mortgage term will have to increase to pay off the full loan.
One advantage of an interest‐only mortgage is that the capital is guaranteed to be repaid at the end of the term. True or false?
False. The availability of funds to repay the mortgage depends entirely on the performance of the investments chosen as the repayment vehicle or sufficient funds being available from other sources.
Gordon wishes to arrange an interest‐only mortgage to buy his new property. Which of the following repayment strategies would be most unlikely to be acceptable to the lender?
a) An ISA funded monthly.
b) Allocating his quarterly bonus payments to reduce the capital balance.
c) A potential inheritance as the beneficiary of his 65‐year‐old aunt’s will.
d) A unit‐linked endowment policy.
c) A potential inheritance is not regarded as a credible repayment strategy.
A second APRC figure is a requirement for fixed‐rate mortgages. True or false?
False. The second APRC is required for variable rate mortgages.
The daily rest basis of calculating interest is advantageous to people who are often late with their mortgage repayments. True or false?
False. The daily rest calculation of interest benefits early payers, because their total interest is reduced.
For an interest‐only retirement mortgage, it is true to say:
a) the lender must assess the borrower’s ability to meet the mortgage payments.
b) the lender is required to carry out a review of the borrower’s repayment strategy at least once during the term.
c) no regular payments are required from the borrower.
a) Retirement interest‐only mortgages are pure interest‐only mortgages and require an affordability assessment. They do not require a repayment vehicle.
Which of the following is excluded from the APRC calculation?
a) Valuation fees.
b) Higher lending charges.
c) Redemption charges for sealing the mortgage deed.
d) Early repayment charges.
d) Early repayment charges.
